YMAX: Diversification makes this strategy attractive

Introduction

The YieldMax Universe Fund of Options Income ETFs (NYSEARCA: YMAX) is a fund of funds, in this case, an ETF that only holds other ETFs, which was launched by controversial ETF provider YieldMax in January earlier this year. year. Since launch, it has performed about as I expected: it returned positive in total return, but lost in price.

The fund is an equal weighted fund of all YieldMax options income ETFs, which includes 22 YieldMax ETFs, all holding around 4-4.5% of assets.

My regular readers will know that I am historically a YieldMax hater. I’ve written about a few of their funds, none of which have had a positive tone. In fact, my first Seeking Alpha article about a YieldMax fund was my first sell rating.

I have a mixed balance sheet here, with my initial call and downgrade on the TSLA YieldMax Options Income Strategy ETF ( TSLY ) being a massive success and my NVDA YieldMax Options Income Strategy ETF ( NVDY ) being a failure .

I’m still bullish on these single-stock funds and encourage readers to go back and look over those articles, as the risks they discuss have not diminished despite the outperformance.

While I haven’t changed my views on these ETFs as individuals, looking at YMAX as a fund of funds has given me a different perspective on the strategy. I think in this format, the strategy that YieldMax uses could be profitable for investors.

Fund overview

Here are some of the defining attributes that investors may be interested in for YMAX:

The fund has a management fee of 0.29%, but its underlying assets gave it an additional fee of 0.99%. The gross ER for YMAX is 1.28%.

According to YieldMax, YMAX has an incredible yield. I’m including it below because YCharts calculates it much lower as it looks cactus colored line above.

The major risk for most single-stock ETFs we’ve covered in the past is simple: they rely on the performance of a single stock. This is a major problem for most investors in these funds, who are happy to trade up for income. YieldMax funds do not have the same price-earning potential as the stocks they cover because their growth is capped to produce income.

Underlying performance

In the past, the argument I’ve made is that investors would be better off buying the stock itself and completely ignoring all of the options on top of it. I was right in every respect.

One common thing in all of these charts is that investors saw more volatile but higher returns holding the stock over the YM ETF. Don’t get me wrong, volatility is something I like in options; I have been a very open bull on short volatility strategies.

When there is a single point of failure in a short volatility strategy, the tail risk is very high and the strategy seems unattractive to me. However, because of the way YMAX is built, no single stock can deposit the fund and damage it in a free fall.

I demonstrated this risk in my CONY article as COIN investors saw an almost 90% discount from the IPO. This would have devastated CONY if it had existed back then and could have caused the fund to be shut down.

Absent this concentration tail risk, I see great potential for short volatility in a select few stocks that the YieldMax managers have identified as good targets for this strategy.

risks

Limited upside but more downside?

The single stock concentration risk spread has given YMAX quite a high correlation to the return of the US markets (the proxy I use SPX for), but only within the scope of its total return. In terms of value for money, we still see some weaknesses with the YMAX.

The weakness of YMAX, which underperforms a large-cap index, is inevitable. The income strategy is based on a capped advantage, which means the fund should always underperform in rising markets. It should theoretically outperform in falling markets. However, looking at the shooting in the last month, that was not true. Not only does the YMAX appear to have softer peaks, but also deeper troughs. This is a red flag that investors should consider.

The first thing to notice is how dividends soften YMAX returns. The onyx the line above the dividend factors and their distribution dates are shown with “D” icons.

The reason for this underperformance of US large caps is unknown because there are too many moving parts in YMAX funds. Here are some ideas I have:

• Individual YM single-stock funds trade intraday, which means their strategy is never consistent from day to day, leading to poor performance.
  • This could be due to the bad timing of the trades, as most of the trades in the funds are timed by the managers and executed during the day.
• Individual YM Single Equity Funds consist of synthetic options positions instead of long stocks, which are subject to significant Vega risk, which could cause losses even if the position is directionally correct.

FITNESS

Who is this ETF for?

My answer to this question is surprisingly simple: I give it a buy rating because I feel this strategy could have a place in most income-oriented portfolios.

For aggressive income investors, I recommend not allocating to any individual YieldMax fund and instead only recommend up to 5% allocation to YMAX. I’d also recommend pairing this fund with a short volatility strategy that targets the VIX, such as the Simplify Short Volatility Premium ETF (SVOL), which I’ve written about extensively. We have previously recommended a 15% allocation to SVOL in an income portfolio; Together, I would recommend a 1:2 allocation of YMAX to SVOL, and an aggressive portfolio could reasonably hold up to 5% of assets in YMAX and 10% of assets in SVOL.

Conservative income investors should not invest in any YieldMax fund, period. They are too volatile for conservative investors, who are better off getting their exposure to the equity premium from less leveraged and less aggressive funds like JPMorgan’s JEPI.

Conclusion

Finally I gave in and saw the light; Finally, I will admit that YieldMax offered something I could recommend to income-oriented investors.

The YieldMax Universe Fund of Option Income ETFs gives investors access to a uniquely managed short volatility strategy that doesn’t suffer from the same extreme risks that made me loathe ETFs like TSLY, CONY, and NVDY. YMAX is diversified across 22 funds, all held at equal weight, so that no performance of the underlying stocks can significantly affect the price or total return of the fund on its own. This is a major advantage for investors already interested in the strategies that underlying funds use.

Investors should remain cautious as these funds have had a history of underperforming both rising and falling stock indexes. Despite the promise of YieldMax funds offering huge returns of over 50%, it may not materialize. For this reason, conservative investors are advised to avoid this fund (and the company as a whole), but aggressive investors are advised to allocate up to 5% to their income portfolios.

Thanks for reading.